10 Misconceptions About the Employee Retention Tax Credit

In 2020 and 2021, the federal government provided several financial relief packages to businesses to help them survive during the pandemic. The Employee Retention Tax Credit (ERTC) was one of these. It gave employers a fully refundable tax credit for any of their W-2 employees that remained employed during any part of the period from March 12, 2020 to September 30, 2021. Unfortunately, many businesses failed to file for the credit because of misconceptions about the ERTC rules. The good news is that you may still be able to obtain the credit, so it is important to learn the facts about ERTC to determine if you are eligible.

The top 10 misconceptions about ERTC are as follows:

1.  My business didn’t experience a decline in gross receipts, so I don’t qualify. It’s true that one way to qualify for the ERTC is to show a significant decline in gross receipts in 2020 and/or 2021 compared to 2019. However, you can also be eligible for the ERTC if you were completely or partially shut down due to governmental orders or you are a recovery startup business. In the latter two situations, you are not required to show a decline in gross receipts.

2. My business is not eligible for the ERTC because I received a PPP loan. Initially, businesses had to choose between the PPP and ERTC. The IRS has since changed their guidelines and employers can now claim both. However, if your business applied for loan forgiveness, you can only use the ERTC on qualified wages that did not fall under the loan forgiveness.

3. My business was partially open, so I don’t qualify. The ERTC rules state that a business can qualify even if it was only partially shut down due to governmental orders. A partial suspension means that under the facts and circumstances, more than a nominal portion of the business operations were suspended by a governmental order or business operations continued but were subject to modification due to a governmental order that had more than a nominal effect on the business operations.

4. I have an essential business that doesn’t qualify for the ERTC. An essential business can be eligible for the ERTC if it experienced a full or partial suspension of operations, such as if the business’s suppliers were unable to make deliveries of critical goods or materials due to a governmental order that suspended the supplier’s operations. In addition, an essential business can qualify for the ERTC because it had a significant decline in gross receipts or because it is a recovery startup business.

5. I have a non-profit organization that is not eligible for the ERTC. Non-profits can apply for the ERTC if they were partially or fully shut down due to governmental orders or they can show a significant decline in gross receipts in 2020 and/or 2021 compared to 2019.

6. My business launched during COVID, so it doesn’t qualify for the ERTC. In 2021, the ERTC was expanded to apply to recovery startup businesses which are those that began carrying on a trade or business on or after February 15, 2020. Such businesses have a different set of criteria as discussed in our previous blog post [ https://bit.ly/3ihbWQ5].

7. The ERTC doesn’t apply to the wages of part-time employees. Employers can take the credit for qualified wages paid to all W2 employees including those who worked part-time. However, how qualified wages are calculated depends on the average number of full-time employees the employer had in 2019. If an employer had less than 100 full-time employees in 2019, it can include all wages paid to employees regardless of whether the employee was working. If over 100 employees, employers can only take the credit for “wages paid to an employee for time that the employee is not providing services due to either (1) a full or partial suspension of the employer’s business operations by a governmental order, or (2) the business experiencing a significant decline in gross receipts.” Note that for 2021, the number of employees was raised to 500.

8. It’s too late to file. I don’t have enough time to submit my claim before the deadline. You have three years to file for the credit. That means you have until April 15, 2024 to file an ERTC claim for the 2020 tax filing year and April 15, 2025 for the 2021 tax filing year. Note that a business may request an extension of time to file a business tax return. You must file Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund Form) for each quarter you failed to claim the credit.

9. The ERTC is a credit, not cash. The ERTC is a fully refundable tax credit that creates a reduction in wages in the amount of the credit. If you failed to file for the credit initially, you can amend your tax return and once the credit is approved, the IRS will issue a refund including interest.

10. My business did not retain all of its employees so I don’t qualify for the ERTC. The ERTC only applies to qualified wages made to an employee who continues to be employed. Therefore, it’s true that you cannot claim the credit for anyone who was laid off. However, if you furloughed employees for some period prior to a layoff, you may be able to claim the credit for wages paid during the furlough. And, you can obtain the ERTC for any employees you did retain.

The ERTC is complicated. Accordingly, it is best to work with experienced professionals who can help evaluate whether you qualify and prepare the necessary documentation to support your claim.

If you think that you might be eligible for the ERTC, contact us for a consultation. Our team at Funding Forward has helped clients recover over 1 billion dollars to date. We can take care of the paperwork so you can concentrate on your business.

 

Are You a Recovery Startup Business Eligible for the Employee Retention Tax Credit?

Are You a Recovery Startup Business Eligible for the Employee Retention Tax Credit?

Startup companies that were brave enough to launch during the COVID-19 pandemic may finally have something to celebrate: a government-sponsored influx of cash directed specifically toward startups. Thanks to the passage of the American Rescue Plan Act (ARPA) of 2021, companies that launched just before and during the pandemic may be eligible for the Employee Retention Tax Credit (ERTC).

How Does ARPA Benefit Startups?

During COVID, many existing businesses qualified for governmental relief programs, such as the ERTC. However, new businesses missed out because they couldn’t show that they lost revenue or were shut down due to the pandemic. That changed in 2021. ARPA was passed by the federal government to ease the economic burden that COVID-19 wreaked on small businesses, particularly those trying to launch under such difficult circumstances. Part of this legislation introduced a new way to qualify for the ERTC for “Recovery Startup Businesses” founded after February 15th, 2020. The law created separate and arguably simpler eligibility rules for such businesses compared to companies existing before COVID. As a result, qualifying startups can see significant money to help their business.

How Can You Qualify As a Recovery Startup Business?

There are three requirements to qualify as a Recovery Startup Business. The first one is based on when your business started. Under IRS rules, a business must have begun carrying on a trade or business on or after February 15, 2020, pretty much right when the pandemic started. However, it’s important to note that it is not enough to just launch a business; an entity has not begun to carry on a trade or business until it has conducted regular activities geared toward making a profit. This would also allow companies who “launched” their business before February 15, 2020, to be eligible if they had not conducted activities towards profit until after February 15, 2020.

Second, you must satisfy the “gross receipts test.” The IRS requires that a Recovery Startup Business have average gross receipts below $1,000,000 for their first taxable year. Most small startups fall well below this threshold but there are certainly outliers. It is crucial to consult a professional to ensure you meet this qualification because the gross receipts analysis can be complex, depending on the circumstances. Additionally, If there are other companies with the same owner, for the 3-taxable year period preceding the inception of the new company (2018-2020), the combined average annual gross receipts of all owned companies must be less than $1,000,000.

Accordingly, if you started your company post-February 15, 2020, generated under $1,000,000 in gross receipts, and didn’t suffer government-mandated restrictive measures, you can qualify for the ERTC as a Recovery Startup Business.

However, if you own other businesses or you are an investor in other ventures, an analysis should be done by a professional to determine whether that may disqualify your company as a Recovery Startup Business.

How Much Money Can a Recovery Startup Business Get Under the ERTC?

Qualifying Recovery Startup Businesses can claim a tax credit of up to $7,000 per worker, per quarter for wages paid after June 30, 2021, and before January 1, 2022. They can get as much as $50,000 for Q3 and $50,000 for Q4 of 2021, a huge benefit for small, growing businesses.

Additionally, if a business would be eligible under the criteria that apply to regular businesses (partial suspension or revenue reduction) and still want to qualify as a Recovery Startup Business, they are not allowed to claim more than $100,000 in total 

Conclusion

While the ERTC rules are somewhat simpler for Recovery Startup Businesses, there are still several confusing issues that can disqualify a business or delay receipt of the money if proper documentation is not provided. It is best to consult a professional for assistance. Note that even if you have already filed your quarterly returns, you can amend your return to get the credit.

Funding Forward is highly experienced in helping businesses apply for the ERTC program, having assisted 13,000+ businesses secure over $1 billion. Contact us today for a consultation.

The Employee Retention Credit Effect On Your Income Tax

As a response to COVID, the federal government enacted the Employee Retention Tax Credit (ERTC) to help businesses retain their employees. However, many businesses did not claim the credit initially and instead filed or will file retroactively. As a result, they may be unfamiliar with how the ERTC affects their income tax return when claiming the credit, and once they receive payment.

What Is the ERTC?

The ERTC is a fully refundable tax credit for W2 employees that remained employed during the period from March 12, 2020, to September 30, 2021. The amount of the credit and the requirements that businesses must meet to qualify for the credit are addressed in our prior blog post on 7 Things Your Business Needs to Know About the Employee Retention Tax Credit.

How Does the ERTC Affect Taxable Income? 

The ERTC is not considered taxable income under Internal Revenue Code (IRC) Section 280C. Instead, it creates a reduction in wages in the amount of the credit. This reduction occurs in the year the wages were paid. For example, a credit claimed for any quarter of 2021 must be reflected on the 2021 tax return.

What Happens If the ERTC Wage Reduction Is Not Taken on the Business’s Income Tax Return?

If an income tax return was filed without reflecting the ERTC wage reduction, IRS Notice 2021-49 states that an amended business income tax return or administrative adjustment request (AAR) for partnerships must be filed showing the reduction in wages.

This is the situation many businesses are in today. They must seek a refund because they didn’t claim the credit in their original tax return. Businesses must file Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund Form) to amend their return for each quarter that they failed to claim the credit. The ERTC cannot be taken on a later income tax return.

How Should Businesses Report Interest Paid By the IRS?

Once the credit is approved, the IRS will issue a refund including interest. Generally, ERTC interest payments are treated like other interest income and are subject to the regular interest rules under the Internal Revenue Code. Accordingly, a cash-basis taxpayer will report the interest in the year it was received, while an accrual-basis taxpayer will report the interest at the earlier of (1) receipt of the refund or (2) approval of the refund claim by the IRS.

How Does the ERTC Affect State Income Tax Returns?

While many states follow the federal treatment, some do not, so it is important to consult with your accountant.

What Information Should Businesses Provide to Their Accountants?

If you claimed the credit, you should let your accountant know the details and amounts of the claim. Funding Forward provides clients with a summary of the claim before filing which should be forwarded to your accountant which will reflect the necessary changes to your tax returns.

The ERTC rules are complicated and time-consuming to address. Our team at Funding Forward has extensive experience handling ERTC claims. We’ve assisted thousands of businesses recover over 1 billion dollars and can help you get the money you are owed. Contact us today for a consultation.

Funding Forward Joins the Inc. 5000 As One of the Fasting Growing U.S. Companies

Funding Forward LLC announced that it was recently named to the Inc. 5000 as one of the fasting growing private companies in the U.S. Every year, Inc. magazine celebrates entrepreneurial success by recognizing companies with the highest percentage of overall revenue growth in the last three years. Funding Forward achieved this distinction by growing 618% from 2018 to 2021 and is ranked at number 1,047 on the list. [www.inc.com/profile/funding-forward]

Funding Forward has helped businesses take advantage of innovative ways to fund their company from tapping into public funding, to obtaining State and Federal tax credits, to coordinating with private capital sources. As a result of the pandemic, its services have become even more crucial. Funding Forward has dedicated itself to educating businesses about COVID and other relief programs and tax credits to enable companies to survive and thrive in these difficult times.

Company CEO David Schlesinger acknowledged the honor of being listed in the Inc. 5000 and gave credit to those who have supported the company. “We are grateful to our employees for their hard work and our clients for trusting us to assist them with their companies.” Noting that there are continuing challenges for businesses, he promised to continue to research and identify alternative funding strategies for clients. “Our company’s growth demonstrates that businesses need help navigating a complicated maze of financing options. We look forward to continuing to provide that expertise to our clients so they can grow and succeed.”

To qualify for the Inc. 5000, companies must have been founded and generating revenue by March 31, 2018, be U.S.-based, privately held, for-profit, and not subsidiaries or divisions of other companies as of December 31, 2021. Businesses are profiled on Inc.com. To view the whole list, see www.inc.com/inc5000/2022.

About Funding Forward LLC
Funding Forward is a leading trusted resource for companies seeking an influx of capital by providing strategic government-backed business funding and specialty institution-based financing solutions. Our clients know that we challenge traditional lending norms by identifying every available funding platform – from public funding and grants, to State and Federal tax credits, to rebates and more – ensuring that they harness all that’s available to help their businesses grow. We provide solutions that are personalized to meet the needs of every entity and built on a foundation of strategy, strength, and synergy. For more information, visit our website.

IRS Delays Impact Employee Retention Tax Credit Refunds

IRS Delays Impact Employee Retention Tax Credit Refunds

On August 31, 2022, the Treasury Inspector General for Tax Administration (TIGTA) released a report on the status of the IRS’s efforts to process employer tax credits provided in response to the pandemic. These included the Employee Retention Tax Credit (ERTC). As a result of changing eligibility rules for the ERTC over the last 2 years, many businesses applied retroactively for the credit. Unfortunately, the report found several problems with the IRS’s processing of these returns, which has resulted in a substantial backlog that has delayed refunds for months or longer.

Why Is There a Delay in Processing ERTC Refunds?
The delay is due in part to the backlog of tax returns created because of the expansion of the ERTC and confusion over the changing rules. Many businesses failed to file for the ERTC when it was enacted in March 2020 because they didn’t qualify. Initially, the law forced employers to choose between the Paycheck Protection Program (PPP) and ERTC program. In December 2020, that provision was changed retroactively allowing businesses to apply for both programs in certain situations. The law was later extended through December 31, 2021, and expanded to cover Recovery Startup Businesses (RSBs), which were businesses who began carrying on a trade or business after February 15, 2020. In November 2021, the ERTC was terminated retroactively to September 30, 2021, except for recovery startup businesses. All of these changes have meant that employers have been and are continuing to file amended returns in large numbers to receive the credit. Businesses have a three-year deadline to file an amended return.

In addition, the IRS did not begin processing amended returns for the ERTC (Forms 941-X) until 12 months after the initial legislation was passed. Further, even after the 12 months, there have been continuing delays and the IRS did not begin tracking the processing of amended returns until September 2021.

Finally, the delay is also due to the fact that amended returns claiming the ERTC must be filed as paper returns and mailed to the appropriate IRS office. Paper tax returns have a substantially longer processing time than e-filed returns.

How Many Returns Are Awaiting Processing?
The IRS hit the peak of backlogged returns in February 2022 with 447,435 Forms 941-X waiting to be processed. Of these, 90% were delayed more than 45 days and 13.6% were delayed more than 180 days. However, as of August 1, 2022, 2,484 have yet to be processed. However, this does not include returns referred to Examination for further review, so there are still additional claims awaiting a decision.

What Other Problems Exist with Processing ERTC Claims?
The report also criticized the IRS’s review of potentially fraudulent claims stating that it failed to refer returns for Examination that met CAT-A referral criteria. As of March 10, 2022, the IRS identified 11,096 returns with more than $2 trillion in credit claims.

In addition, the IRS had no process for confirming whether employers meet the requirements to be considered an RSB. The IRS plans to review returns that may have been erroneously approved.

When Should Businesses Expect to Receive Their ERTC Refund?
For those who timely filed for the ERTC electronically, payments were made quickly. However, for employers that filed amended tax returns by mail, it appears that the processing time depends in part on the amount of the claim.

Based on a sampling done by the TIGTA, claims over $300,000 are being automatically referred for audit. As a result, payments may take 12+ months. For claims under $300,000, the timing is 3-4 months. However, this assumes that all documentation complies with IRS rules and regulations.

If you are interested in filing for the ERTC, working with an experienced consultant like Funding Forward is important to avoid further delays in getting your money. Our team can assist you in filing for the ERTC and ensure that you are compliant with all the rules and regulations so you can get paid as soon as possible.

Contact us today for a consultation.

 

7 Things Your Business Needs to Know About the Employee Retention Tax Credit

If your business declined in revenue in 2020 and/or 2021, you may qualify for the Employee Retention Tax Credit (ERTC). The ERTC was passed by the federal government to help employers afford to keep their employees. Unfortunately, many business owners are not aware of the credit, think they are not eligible for it, or believe it has expired. In reality, the program was expanded several times and continued through September 30, 2021. Best of all, it is still possible to obtain the credit retroactively if you failed to claim it or you were previously told your business did not qualify. Here are some key facts you should know about the ERTC:

What Is the Employee Retention Tax Credit?

The ERTC is a fully refundable tax credit for W2 employees that remained employed during the period March 12, 2020, to September 30, 2021. It is equal to 50% of qualified wages (of the first $10,000) that eligible employers paid their employees in 2020 up to a credit of $5000 per employee for the year and 70% of qualified wages paid to employees for each of the first 3 quarters of 2021 up to a credit of $7,000 per employee per quarter.

Why Would a Business Want to Claim the ERTC?

Unlike other COVID-related relief programs, the ERTC provides funds that do not have to be paid back and can be used for any purpose. That means cash for businesses to fund operations and capital expenditures, pay back other loans, and reduce the need for additional financing.

Who Is Eligible for the ERTC?

Businesses and non-profits, including colleges and universities (added in 2021) are eligible if they were completely or partially shut down due to governmental orders or experienced a significant decline in gross receipts during the pandemic.

To be considered as having a significant decline in gross receipts for 2020, employers must demonstrate a decrease of 50% in revenue in any quarter compared to the same quarter of 2019. In 2021, it is a decrease of 20% in revenue compared to the same quarter in 2019.

The credit can be applied on a wage basis (e.g., per week), if it is demonstrated that the effect occurred during that pay period. Importantly, employers must apply and qualify quarterly for the credit. Each quarter must show a drop in revenue compared to the same quarter in 2019. However, employers can elect to use the quarter immediately preceding the quarter they are claiming. For example, to claim the ERTC in Q2 2021, instead of comparing the second quarter of 2021 to the second quarter of 2019, the business can choose to compare the first quarter of 2021 to the first quarter of 2019 instead.

How Much Is the ERTC Worth?

In 2020, businesses that employed less than 100 full-time employees in 2019 can claim up to $5,000 per employee for the calendar year. However, in 2021, that amount was increased to a maximum of $21,000 per employee for businesses that employed less than 500 full-time employees in 2019.

Can Businesses That Received Paycheck Protection Program (PPP) Loans Apply for the ERTC?

When the CARES Act was first passed, businesses had to choose between the two programs but that was subsequently changed. Employers can claim the ERTC even if they received a PPP loan. However, if the business applied for loan forgiveness, the credit cannot be taken on the same qualified wages. Any wages that did not fall under the loan forgiveness can be eligible.

How Long Do Businesses Have to Claim the ERTC?

The program ran from March 12, 2020, to September 30, 2021. If you have not filed for the credit, you have three years to file Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund) to get the credit. Accordingly, you have until 2023 to obtain the credit for quarters in 2020 and until 2024 to apply for the credit for 2021.

Do You Need Assistance with Filing for the ERTC?

As noted above, employers must apply quarterly and each time they must prove that their business was affected by government orders, or their revenue decreased in the specified amount compared to the same quarter in 2019. The documentation requirements are extensive, and audits are likely to be troublesome if you do not comply with all rules and regulations. By hiring an experienced consultant, you can ensure that your business is eligible for the program, complies with all rules, and submits audit-proof filings.

Funding Forward has helped 13,000+ businesses affected by Covid-19 secure over 1 billion dollars. We work with your staff and financial team, handle the paperwork, and respond to auditor questions so you can concentrate on operating your business. Leave the details and stress of tax filings to us. Contact us today for a consultation.

 

 

 

Disclaimer: The information contained in this site is provided for informational purposes only and should not be construed as legal advice on any subject matter.